Canaccord Genuity initiated coverage of the space on Tuesday, with a “favourable view on the industry.” It also noted that prison REITs are relatively cheap compared to their peers.

“We believe the sector offers a unique blend of very defensive fundamentals with significant and accretive external growth potential,” Canaccord analysts Ryan Meliker and Michael Kodesch write in a note to clients.

REITs have been punished this year as fear of higher interest rates has investors looking elsewhere for income. Most investors buy REITs for their yield, meaning any prospect of higher rates tends to create a stampede out of the space.

Prison REITs, however, offer some upside potential that protects them from rising rates. For starters, Canaccord notes that the two prison REITs it covers — GEO Group and Corrections Corp. — trade at a low valuation of 4.8 and 4.6 times funds from operations (FFO), respectively.

Prison REITs should also benefit from some recent trends in American politics. The biggest driver will likely be privatization of the prison industry as local municipalities look to trim their budgets. Canaccord points out that while this has been accelerating in recent years, private prisons still maintain an only 8.3 per cent marketshare.

Between GEO Group and Corrections Corp., Canaccord prefers the former, noting it has a higher yield (seven per cent versus 6.4 per cent) and a global business model, with presence in South Africa, Australia and Canada, in addition to the U.S.